4 salomon v a salomon & co ltd

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4 CORPORATE PERSONALITY &

LIMITED LIABILTY

Corporate Personality:

Corporate Personalityrefers to the fact that

As far as the law is concerned a company personality reallyexists

Apart and different from its owners. As a result of this, a company can sue and be sued in its own

name,

Hold its own property and crucially

be liable for its own debts. It is this concept that enables limited liability for shareholders

As the debts belong to the legal entity of the company and

Not to the shareholders in that company.

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Limited Liability:

Limited liability is a concept whereby a person'sfinancial liability is limited to a fixed sum,

Most commonly the value of a person's investment in

a company or partnership with limited liability. If a company with limited liability is sued, then

the plaintiffs are suing the company, not its ownersor investors.

A Shaeholder in a limited company is not personallyliable for any of the debts of the company,

Other than for the value of their investment in that

company.
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The History of Corporate Personality:

Corporate legal personality arose from the activities oforganizations such as religious orders and

local authorities

which were granted rights by the governmentto hold property and

sue and be sued

in their own right and

not to have to rely on the rights of the members behind theorganization.

Over time the concept began to be applied to commercialventures with a public interest element

such as rail building ventures and

colonial trading businesses.


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The History of Corporate Personality

However, modern company law only began in themid nineteenth century

when a series of Companies Acts were passed

which allowed ordinary individuals to formregistered companies with limited liability.

The way in which corporate personality and

limited liability link together is best expressed byexamining the key cases.


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Salomon v A Salomon & Co Ltd [1897]

AC 22:

Salomon v Salomon & Co. [1897] AC 22,

Mr. Salomon carried on a business as a leather

merchant. In 1892 he formed the company Salomon & Co. Ltd.

Mr. Salomons wife and five of his children held oneshare each in the company other all shares were heldby Mr Salmon.

The members of the family held the shares for Mr.Salomon because the Companies Acts required at that

time that there be seven shareholders


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Salomon v A Salomon & Co Ltd

. Mr. Salomon was also the Managing Director

of the company.

The newly incorporated company purchased

the sole trading leather business.

The leather business was valued by Mr.Salomon at 39,000.


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This was not an attempt at a fair valuation; rather itrepresented Mr. Salomons confidence in thecontinued success of the business.

The price was paid in 10,000 worth of debentures (a debenture is a written acknowledgement of debt

like a mortgage)

Giving a charge over all the companys assets

(this means the debt is secured over the companysassets


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Mr. Salomon could, if he is not repaid his debt,take the companys assets and sell them to get hismoney back), plus 20,000 in 1 shares and

9,000 cash. Mr. Salomon also at this point paid off all the sole

trading business creditors in full.

Mr. Salomon thus held 20,001 shares in the

company, with his family holding the sixremaining shares.

He was also, because of the debenture, a securedcreditor.


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However, things did not go well for the leather

business.

The company was placed in insolvent liquidation

(i.e. it had too little money to pay its debts)and

A liquidator was appointed

(a court appointed official who sells off theremaining assets and distributes the proceeds to

those who are owed money by the company).


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The liquidator alleged that the company was

but a sham and

A mere alias or agent for Mr. Salomon and

That Mr. Salomon was therefore personallyliable for the debts of the company


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The Court of Appeal agreed,

Finding that the shareholders had to be a

bona fide association who intended to go into

business and

Not just hold shares to comply with the

Companies Acts.

The House of Lords disagreed and found that:


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The House of Lords disagreed and found that

the fact that some of the shareholders are only holding

shares as a technicality was irrelevant;

the registration procedure could be used by an individual tocarry on what was in effect a one-man business

a company formed in compliance with the regulations of the

Companies Acts is a separate person and

not the agent or trustee of its controller.As a result, the debts of the company were its own and not

those of the members.


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The members liability was limited to the

amount prescribed in theCompanies Act

i.e. the amount they invested.

The decision also confirmed that the use of

debentures instead of shares can further

protect investors.

4 salomon v a salomon & co ltd

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